Category: outsourcing vs local manufacturing

Opportunities at home and a closing cost gap with overseas sourcing are making domestic manufacturing an increasingly attractive option

U.S. OEMs that go overseas to reduce production costs often don’t realize they can still save money by using a local contract manufacturer. Consider some of the realities facing OEMs, domestic contract manufacturers, and their overseas competitors.

The Cost Gap is Closing: a 2015 study by the Boston Consulting Group has estimated that the cost gap between U.S. Manufacturing and Offshore

In fact, the BCG reports “Within 5 years, the total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the U.S.1”

Once OEMs factor in critical aspects like shipping, inventory, and other incidentals – it becomes quickly apparent that the cost gap between U.S. manufacturing VS. sourcing in China is growing ever-smaller.

But Why?

This closing cost gap is due to a number of factors ranging from rapidly rising wages in China, lower energy costs, better quality control in the U.S., and lower transportation costs.

Overseas Travel is Expensive: The hidden costs associated with overseas travel can quickly eat up much of the savings OEMS might otherwise realize. By relying on overseas manufacturers, OEMS must also contend with the big bill of overseas travel. Plane tickets, hotel rooms, meals, and a wide variety of incidentals that can add up fast. It’s far more affordable to compensate employees who drive to a nearby contract manufacturer or even fly domestically.

Domestic Delivery Can Offer Major Cost Savings: When completed components and finished products are shipped to OEMs – and if needed, their customers – domestic shipping can be a boon to your bottom line. Additionally, materials that aren’t shipped across international borders don’t require extensive packaging. A local contract manufacturer can protect materials with reusable packaging and plastic totes, eliminating the need to use new cardboard and bubble wrap and cutting the cost of disposal for the customer. Money is saved and the carbon footprint of delivery is greatly reduced.

When it comes to making the (hard) decision to choose onshore vs offshore manufacturing, there’s often a misconception that the cost-savings with offshore electronic manufacturing simply can’t be beat.

The reality is that the political climate and changing working conditions overseas up-end this trend.

Better communication, more rigorous best practices, and robust automated assembly capabilities have proven to close the gap when it comes to offering greater value for OEMs

Competitive Automated Assembly Costs Make a Difference

There’s no denying that U.S. companies can’t drop to the low wages that foreign companies pay their manufacturing workers. Minimum wage laws, for one, ensure that U.S. laborers won’t be paid as little as many overseas workers are.

On top of this, U.S. workers assume pride, loyalty, and professionalism when they’re paid a fair wage. That won’t happen if they’re making the same money as a Chinese assembler. U.S. contract manufacturers can be competitive with the rest of the world, however, in automated assembly. Citing the Boston Consulting Group’s study, USA today reports2 that “roughly 1.2 million additional advanced robots are expected to be deployed in the U.S. by 2025” with the computer and electronics industry one of the few leading the charge – all due to the major cost savings delivered by the process, regardless of location.

This enables American companies to reap the benefit of low-cost manufacturing, while simultaneously gaining access to the communication, quality, and “just-in-time” capabilities provided by domestic contract manufacturers.

Add on tariffs, custom-delays, long cycle times, freight costs, and all of the hidden costs inherent with offshoring, and it becomes clear that U.S. built product is capable of delivering the same cost savings. Better yet, they can do it almost dollar for dollar compared with contract manufacturers in other countries.

From the prevention of communication breakdowns to closer working relationships, onshore manufacturing has proven to reduce wasted product and costly delays.

If an OEM needs to contact an overseas contract manufacturer, it’s not always easy. First, time zones and business hours need to align. If a connection is made, the representative on the other end might not speak English. It’s one thing to exchange simple pleasantries when there’s a language gap but intricate business details are a whole other matter. Contract manufacturers in the U.S. handle customer service in English; its employees fluently speak the language of the customers. This means that orders are processed clearly and without confusion.

“What happens when communication doesn’t work?

Basically, anything can happen—and whatever happens is likely to do so in an uncontrolled manner, where the key players no longer know what is going on and therefore cannot steer things in the right direction.

Releasing a new product?

Efficient and fast communication is particularly important for OEMs releasing a new product. Having manufacturing close by, and working with a contract manufacturer that understands what’s needed and can articulate its instructions, ensures that new product introduction will proceed smoothly.

It’s critical for an OEM to hit its production target windows. With only a short drive or domestic flight standing between you and your manufacturer, the proper resources can easily be assigned to ensure fast development and on-demand changes.

Close Working Relationships Create A Culture of Trust

It’s not only the new products that require collaboration and attention to detail. OEMs and local contract manufacturers can work closely on all products. If an electromechanical manufacturer is only a few highway exits away, an OEM can verify – in person – if its product is being built correctly using the specified components, materials, and methods. Contract manufacturers in China and other foreign countries are known to promise one type of component but then substitute a cheaper alternative. Ultimately, the quality of the working relationship comes down to

Information sharing, communication quality, and interfirm adaptation emerged as three significant contributors to the vendor’s trust in the client; goal setting and cultural blending turned out to be significant in influencing the client’s control over the vendor.

When a product is built locally, it can be delivered locally. It arrives in only a matter of days or hours, if required. Products made overseas take weeks or months to arrive by boat. Also, OEMs occasionally need to deliver a product to their customers overnight, which means the contract manufacturer has to deliver the product overnight to the OEM. A local contract manufacturer is better positioned to provide an OEM product fulfillment service, shipping directly to the end customer.

From supporting local economies to more effective disaster management, manufacturing locally keeps U.S. companies in control of their economies and their products.

Buying Local Supports the Local Economy
Manufacturing locally, at its most fundamental level, supports a local economy. The circles of this local work ripple through many organizations and strengthen the U.S. economy. In addition, companies that produce in the U.S. pay taxes to the U.S. government.

Many small- to-mid-sized OEMs aren’t scaled to handle the nuances of offshore production, and prefer to have an intimate relationship with their electronic contract manufacturer.”

But there are other benefits to keeping the manufacturing chain local. For instance, many small- to-mid-sized OEMs aren’t scaled to handle the nuances of offshore production. Companies like these prefer to have an intimate relationship with their electronic contract manufacturer. For them, the close support throughout the design and production process helps realize a better end-product capable of delivering greater value in the long-run.

This relationship also proves beneficial when OEMs require last-minute product changes. An OEM, for example, might realize there is a design problem and it needs to change a circuit board layout. If it relies on an overseas manufacturer, an OEM has to relay the desired changes through emails, phone calls and video conferences if it can’t quickly jump on a plane. Working with a local contract manufacturer enables representatives to simply jump in a car (or a short flight) and go over product changes in person, alleviating confusion and saving time. A local manufacturer can react to those changes quickly and efficiently.

Close production ties also provide the flexibility to ramp-up or ramp-down production at almost a moment’s notice. Usually, ramping-up can be difficult to achieve, but a contract manufacturer that’s equipped to change production can handle an order increase without difficulty. It can also change the product requirements of an order without hesitation.

Flexibility, fast delivery, adherence to specifications – these aren’t promises that are made to be broken. Unlike an overseas manufacturer that can duck the tough questions and not answer why it didn’t uphold its end of the bargain, a U.S. manufacturer stands by its word. It’s easy to hide when you’re overseas.

Did you know?

In 2010, the consulting firm Grant Thornton found that 44% of respondents perceived no benefit from overseas manufacturing, while another 7 percent believed that offshoring had actually caused them harm.

Fast forward to the present day, and the average wage of previously “cheap” offshore labor continues to rise – demonstrating that the value-gap continues to close.

So, does manufacturing “at home” mean OEMs have to suffer? No! Through geography, closer working relationships, and the expectations and regulations of the U.S. market – not only are both parties kept honest, but the manufacturer and their client give new meaning to the term “domestic partnership.”

You can’t recover your stolen intellectual property, be sure that environmental and safety standards were properly followed or, most importantly, walk onto the manufacturing floor to tweak the scheme of your product if you go outside the U.S.

A contract manufacturer in the U.S. aims for responsiveness, timeliness and full support. Its workers have high expectations for the products they deliver, and they believe in accountability. You can’t get that overseas. You can get it locally.

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